Cost is key in the coalition’s brave decision to fire up nuclear energy

Tony Lodge is a research fellow at the Centre for Policy Studies (CPS). He is author of the CPS pamphlet Clean Coal – A Clean, Affordable Alternative.

Tony Lodge

IN 1956, the Queen flicked a switch and Britain’s first nuclear generated electricity surged into homes from the Magnox reactor at Calder Hall. This was the world’s first large-scale nuclear power station. A decade later, several Magnox stations were producing power, but investment in new electricity generating capacity was still insufficient. In the winter of 1964-65, power outages deprived homes and businesses of electricity.

The new Labour Government of 1964 was committed to establishing a national planning regime to help smooth the construction of new power stations. Sound familiar? New advanced gas-cooled reactors (AGRs) emerged (alongside new coal plants) – possibly the worst energy policy decision taken in the UK between 1945 and 1990. The average length of time to build reactors was ten years and it was almost 20 years before output matched planned capacity.

By 1980, the Thatcher Government was left planning only one new nuclear reactor, at Sizewell in Suffolk. It finally came online in 1995, 15 years after inception and following a prolonged public inquiry.

Since the commissioning of Sizewell B in 1995, the British energy landscape has changed radically. In particular, the dash for gas created a major new source of generation. A milestone was passed in 2010 when the UK became over 50 per cent dependent on gas for the generation of electricity. Today, over a third of all the gas used in the UK is used for electricity.

Any major source of low carbon energy will initially be more costly than traditional power generation from fossil fuels. But, based on levelised costs (with market or technology incentives removed), nuclear power is cheaper than the other large-scale low carbon alternatives, including coal and gas with carbon capture and storage. But nuclear power stations are expensive because of large upfront costs and the long construction period. Confidence is essential, but at what cost?

Britain’s most recent nuclear programme is now more than two years behind schedule. EDF Energy has already indicated that it cannot build its first new UK reactor by 2017, as earlier hoped. The Department for Energy now expects the first new nuclear plant in 2019. Even this looks optimistic.

But what price should Britain be prepared to pay for new nuclear plants? If a strike price – the guaranteed price paid for electricity from the plant when completed – is anywhere near the £140 per megawatt hour (MWh) required by offshore wind, we should be surprised if EDF didn’t line our coast with nuclear plants, like France in the 1960s, 70s and 80s. But this is an absurdly high price. Anything close would rightly destroy nuclear’s low cost reputation and, with it, the case for new nuclear. After all, £140 per MWh is more than double the current market price, and the Department for Energy forecasts that electricity prices will fall over the long term.

A challenge for the government is to make the strike price negotiations as transparent as possible. EDF has now increased the cost of each proposed reactor at Hinkley in Somerset by 40 per cent to £14bn in total. Why? The outcome of the strike price negotiation risks saddling householders and businesses for a long time to come with further costs – the subsidy for low carbon power is to be financed by the consumer. This is why transparency and parliamentary scrutiny will be vital. Strike price plans mean that, when the market price for electricity is below the level agreed with EDF, all UK energy consumers will be liable for subsidies to top up the difference.

But does nuclear need a subsidy? Two 1,600MW reactors, operating at 90 per cent efficiency over a 50 year lifespan, could generate £88bn in cash at an average market price of £70 per MWh (which was the government’s median projection for nuclear power last year, making it the cheapest on offer); £126bn at an average price of £100 per MWh; and £163bn at £130 per MWh. These are very large returns on a £14bn capital outlay, recognising the need to count in running costs, contingencies and profit.

The government rightly wants to see new nuclear power plants by 2020. It must now make the case and show that it has negotiated in the national interest and not gone nuclear at any price.

Tony Lodge is a research fellow at the Centre for Policy Studies (CPS). His latest pamphlet, The Atomic Clock – How the government is gambling with Britain’s energy policy, was published this year by the CPS.